How online games teach us about economics.

Fantasy Economics

Why economists are obsessed with online role-playing games.

The most popular article in the leading economics Web archive doesn't concern tax policy, international trade, or the theory of the firm. It's about an online fantasy game.

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During the past year, nearly 16,000 people have downloaded a 40-page economic analysis of EverQuest, Sony's popular online fantasy world of Norrath. "Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier," by California State Fullerton economics professor Edward Castronova, is the No. 1 article in the history of the Economics Research Network, an Internet library of tens of thousands of professional journals and research papers in economics. The article, which you can download here, not only outpaces the online works of every Nobel laureate, it is also the fourth-most popular article on the entire Social Science Research Network, which contains more than 75,000 professional articles and abstracts in range of social sciences.

For cybergaming naifs—most males over age 30 (me included) and almost all women—virtual worlds are elaborate, multiplayer, role-playing online environments in which each player's actions can affect many others. At any given moment, 50,000 or more people from more than 120 countries are online at EverQuest, moving their personal "avatars"—wizards, trolls, amazonlike women, and a dozen other types—through the fanciful landscapes of Norrath. These dramas unfold on more than 40 dedicated Sony servers, each accommodating up to 2,000 players interacting with the program and each other. (EverQuest is only one of several popular MMORPGs—"massively multiplayer online role-playing games." The oldest, Ultima Online, has 225,000 players; and the largest, Lineage, has more than 4 million subscribers, mostly in Korea.)

What intrigues Castronova and other economists about EverQuest—beyond the fact that more than 500,000 people pay Sony $13 a month to participate—is that something resembling a nascent economy has emerged in Norrath. Inadvertently, EverQuest has become a virtual experiment in some of the fundamental questions in economics: What are the necessary conditions for markets; how much government does capitalism require; and how do equality and inequality affect economic development?

According to Castronova's account of it, EverQuest has something to gratify economists of all political stripes. For natural-law types, Norrath suggests that the conditions for vibrant markets to develop are pretty minimal. Libertarians can delight that "government," in the form of rules restricting a player's activity, is also limited in Norrath. And liberals can take heart that Norrath's market and society rest on initial conditions of radical equality.

The most basic condition for market activity built into EverQuest is that resources in Norrath are limited. In particular, a player chooses his avatar's initial traits, but a character with the power to heal wounds, for example, will lack agility; and another smart enough to decipher codes will be physically weak. Unlike real life, therefore, everyone in Norrath starts out with roughly equal resources.

The second basic condition of self-regulating economic life in this virtual world, as in our own, is that nothing is free. An avatar's initial assets aren't enough to make much headway in the game, so players intent on navigating Norrath's challenges have to work at either developing new skills or earning new assets.

The intriguing part is that most MMORPG players expand their assets and abilities not through violence or chicanery, the modus operandi of a typical single-player computer game, but through virtual market transactions. Hundreds of thousands of EverQuest players spend most of their time in Norrath trading or cooperating with other avatars, buying goods from creatures ("bots") built into the program, or using auction sites inside the game. To facilitate this, EverQuest adopted two other key conditions from real economic life: A currency called "platinum pieces," or PP, can be earned by completing various tasks, and there are rudimentary rules for buying, selling, and bartering.

These few conditions are apparently all it takes to precipitate capitalism in cyberspace. As in a real economy, virtual market conditions change in response to how players behave. For example, shrewd players who know Norrath's nooks and crannies will purchase goods in a game zone where they've become abundant and then sell them in another where they're in greater demand.

The kicker for economists is that these virtual economic relationships have broken into the real U.S. economy. When players found EverQuest's bartering rules inadequate, they started exchanging the armor, spells, and other Norrathian objects of value at real-world auction sites. These transactions are conducted not in Norrathian PP but in U.S. dollars and then completed between avatars inside the game. (You pay in dollars at a real-world site, then the seller's avatar gives your avatar the goods in Norrath.) You can even buy another player's avatar, complete with its accumulated skills and assets. Sony tried to stop all these transactions and persuaded eBay and Yahoo! Auctions to bar them on the grounds that they involve Sony's intellectual property. But this kind of protectionism is hard to enforce whether the goods are real or virtual: Trade in Norrathian goods and services simply migrated to other sites.

The exchange of goods and services in Norrathian PP, inside the game, and U.S dollars, outside, creates an exchange-rate relationship between the two currencies. Based on surveys of these market exchanges, Castronova calculated that one unit of PP was worth a little more than one U.S. penny. That technically makes Norrathian PP a "stronger" currency than the Japanese yen or Italian lira, albeit a thinner and less liquid one. (But Sony apparently could use lessons in central banking: As in real-world Japan, price deflation has hit the market for Norrathian goods.)

The economic dynamics of EverQuest also allow Castranova to calculate wage levels in Norrath. Take the PP value of an average avatar's skills and assets, divide it by the average number of hours required to accumulate those holdings, and an average avatar "earns" 319 PP/hour, or $3.42/hour at the prevailing exchange rate. (This doesn't sound like much, but Norrath's deflation means that "real" wages are actually rising.) Castronova estimates that Norrath's per capita GNP is higher than India's or China's.

The similarities to real-world market behavior certainly owe much to the fact that EverQuest players know how real markets work and probably believe in markets. In this respect, Norrath resembles the more successful transitional economies of Central Europe, whose citizens had a history of capitalism to draw on when their communist regimes crumbled. (Russia, by contrast, had no history of market capitalism and has struggled to make the transition to free markets.)

EverQuest liberates its players from some of the dismal restrictions of real economic life. Norrath is a truer meritocracy than our own, with no one hindered or helped by personal history or family background. The game also offers the ultimate safety hatch (a superenhanced version of Chapter 11 bankruptcy protection): Fail at one of Norrath's deadly challenges, and you can start over with a new avatar and new identity.

What may be most striking about Norrath is that the virtual market doesn't require a powerful government. Norrathian economic life, conducted in PP or dollars, proceeds without laws stipulating the terms of exchanges, regulations dictating who can participate in various activities, or authorities enforcing contracts. There are no monetary or fiscal policies to manage demand and prices, and no safety net.

In this virtual world, a powerful government appears only briefly at the start, in the iron rule that everyone starts out with roughly equal assets. Then it retreats and lets economic nature take its course. In Norrath, more equality permits freer markets. This may provide the most important lesson of all from the EverQuest experiment: Real equality can obviate much of a democratic government's intervention in a modern economy. Many of our own government's current policies—progressive taxation, securities regulation, social insurance—are aimed at offsetting some form of inequality. If EverQuest is any guide, the liberal dream of genuine equality would usher in the conservative vision of truly limited government.